“The biggest risk to the high yield sector over the next six to 12 months is slower global growth. This would most likely come from a recession in the US or a greater-than-expected slowdown in the Chinese economy,” Todd Vandam, co-portfolio manager for global high yield, told FSA.
However, a global economic slowdown is not expected in the short-term, given accommodative monetary conditions and an apparent strategy of gradual rate increases by the Federal Reserve, he added.
Within the high yield sector, volatility is expected to stay elevated due to considerable uncertainty concerning Fed policy actions and investor sentiment. But market conditions have been more accommodative since the Fed’s March meeting, he said.
Weaker pricing in distressed debt is likely given increasing downside risks and poor liquidity conditions, and more downgrades and defaults are expected to happen in the distressed category, if the low oil price environment extends further than 2017.
In this environment, maintaining a high-quality credit bias should help insulate against defaults, but higher risk aversion would undoubtedly push spreads wider across the entire asset class, he said.
“Given our outlook for where we are in the credit cycle in different areas around the world and the current valuations, our strategy is to maintain a neutral position toward risk.
“We are underweight the high-yield sector for the emerging markets, specifically those in Asia. We are neutral weight the eurozone and overweight the US high-yield market where we find a better mix of growth and yield for our outlook over the next twelve months,” he said.
The recovery in risk assets since mid-February has generated strong performance across industries within high yield, he said.
Oversold areas, such as energy, have rebounded significantly with oil prices up 60% in May versus their low in February, he said.
“Despite the recent rally, we still believe that the energy industry will generate attractive risk adjusted returns based on our outlook for energy prices over the next twelve months,” he said.
The Natixis-Loomis Sayles Strategic Alpha Bond fund versus its benchmark index over the past three years
Source: FE Analytics